Capital gain, a central concept in finance and taxation, represents much more than a simple financial measure. It embodies the fruits of investment, the risks taken and the rewards achieved in the complex world of financial markets. Understanding how it works is crucial to managing your financial assets.
A reminder of the definition of capital gain
Capital gain is the difference between the sale price of an asset (such as stocks, bonds, real estate, etc.) and its cost. When you sell a capital asset for more than it cost, you realize a capital gain. This gain is generally taxable in Canada. Currently, only half of the capital gain is included in taxable income, which reduces the tax impact and represents an advantage over other types of income, such as business income, which is included in full.
The impact of the April 16, 2024 Federal Budget on capital gains
- The inclusion rate for capital gains of up to $250,000 realized annually by individuals will continue to be 50%.
- The federal government increases the inclusion rate from 50% to 66.67% on capital gains over $250,000 realized annually by individuals and on all capital gains realized by corporations and trusts.
- The new inclusion rate is scheduled to come into effect on June 25, 2024.
- Increase the lifetime capital gains exemption to $1,250,000 for capital gains realized on or after June 25, 2024 for qualified small business corporation shares and farm or fishing property, compared to the current balance of $1,016,836.
- As of January1, 2025, a new incentive will allow entrepreneurial founders to benefit, upon disposition of their eligible shares, from a reduced inclusion rate of 33 1/3% (half the rate in effect at the time of disposition) on a portion of the realized capital gain. The limit will be $200,000 per year, increasing by the same amount until January1, 2034, for a total of $2 million.
- For reasons of cohesion, Quebec has announced that it will harmonize its tax system with that of the federal government.
Sell now or wait?
Given the increase in the inclusion rate, it may seem like a good idea to sell an asset before June 25, 2024, in order to benefit from a reduced tax bill. However, each situation is unique and requires analysis of a number of factors:
- Properly identify the value of the assets involved to determine whether the increase in value of the asset for each individual is greater than $250,000.
- Does the asset represent an investment that was planned for the long term, or was the sale already scheduled for the near future, in which case it would be advantageous to accelerate the process?
- Is the expected return on investment greater than the difference in tax saved by the hasty sale of the property?
- Could the capital gain generated lead to alternative minimum tax on the individual’s tax returns?
Looking to the future
For individuals, since the change in the inclusion rate occurs on capital gains in excess of $250,000, it may make sense for those with large investment portfolios to sell certain assets each year to stay below the threshold.
When it comes to unrealized gains on real estate, a hasty sale is unlikely to be the best option. In addition to the inclusion rate, the tax payable on recaptured depreciation must also be taken into account, if depreciation has been taken in the past. Moreover, given the June 25 deadline, it’s unlikely that such a transaction will materialize in time.
There are still many questions surrounding this element of the federal budget, including whether sales price balances will receive special tax treatment.
In conclusion
Specific capital gains tax rules may vary depending on the nature of the asset, the holding period and other factors. Many questions were raised in connection with the last federal budget and remain unanswered to this day. It is therefore important to conduct a specific analysis of your situation before proceeding with any transactions designed to trigger capital gains.
An article from the tax team
